Friday, February 7, 2014

12 February 2014: Earnings Impacts of Foreign Direct Investment

Abstract:
Foreign direct investment (FDI) has the potential to raise domestic productivity and increase incomes, leading to improved living standards. FDI is often argued to be a source of direct benefits to the receiving firm, including improvements in management capability and access to overseas technologies and networks as well as financial capital. If the benefits of improved productivity and profitability are shared with local workers, this can in turn lead to higher incomes for New Zealand workers. Such benefits may also be available to other local firms, via observation, via transactions between foreign-owned firms and local suppliers and customers, through product market competition, and through labour mobility. These benefits (both direct and indirect) are often cited as a rationale for reducing barriers to FDI and supporting greater foreign investment into New Zealand.

This paper explores a key potential source of economic benefits from foreign direct investment – human capital accumulation and earnings increases by New Zealand employees of multinational firms. We consider the following questions:

Do foreign owned firms source labour differently from NZ-owned firms?
Do foreign firms pay higher wages (or provide higher wage growth) for a similar initial level of skill?
Where do employees of foreign-owned firms end up when they leave their jobs?
Does employment in a foreign-owned firm have a lasting impact on individual wages?